The Internal Revenue Service allows for certain mortgage-related deductions from taxable income. The deduction of interest over the life of your mortgage can typically save you thousands of dollars in tax. Other deductions are available, however, and a thorough knowledge and understanding of all them may further alleviate your tax burden.
Private Mortgage Insurance
According to IRS Publication 936, "Home Mortgage Interest Deduction," private mortgage insurance is deemed qualified mortgage insurance. Premiums may be treated as home mortgage interest and deducted from taxable income. The mortgage must meet the rules for home acquisition debt and the mortgage insurance contract must be dated after 2006.
In order to deduct the private mortgage insurance premiums, your mortgage must be secured with your home as collateral. In the event of default, your home may be seized. The home must be a qualified home, meaning any dwelling you keep as a main or second home that has sleeping, cooking and toilet facilities.
Special rules apply when you prepay your mortgage insurance premiums. Prepaid mortgage premiums must be allocated over the shorter period of 84 months or the entire length of the mortgage term. You begin with the month the insurance was obtained, meaning you get a prorated deduction for the number of months your mortgage was in force during its first calendar year. For example, if your prepaid private mortgage insurance premium was $6,048 and your 30-year mortgage was issued in April 2012, you may deduct for 2012 an amount equal to $6,048 divided by 84, multiplied by 9 months: $648. For 2013 you may deduct $6,048 divided by 84), multiplied by 12 months: $864. Continue claiming this deduction until you have claimed for the full 84 months.
If you pay off your mortgage before you can claim all of your unallocated private mortgage insurance premiums, you will not receive a credit for the balance. You can only claim a full deduction for the premiums if you meet an income test. For 2011 returns, for example, your adjusted gross income on Form 1040, line 38, had to be less than $100,000 ($50,000 if married and filing separately). If your AGI was $109,000 ($54,500 if married and filing separately), you could not claim any deduction. For incomes between those amounts, a partial deduction could be claimed. Check Publication 936 instructions for preparing tax returns in the current year for up-to-date AGI guidelines.
Philippe Lanctot started writing for business trade publications in 1990. He has contributed copy for the "Canadian Insurance Journal" and has been the co-author of text for life insurance company marketing guides. He holds a Bachelor of Science in mathematics from the University of Montreal with a minor in English.